Central Bank Digital Currency ‘Incredibly Rich Area’ Says IMF

Tao Zhang, Deputy Managing Director of the International Monetary Fund (IMF) has made a strong argument for the development of Central Bank Digital Currency (CBDCs). He asserts that as a new asset class they hold tremendous promise, notably for the developing world.

BENEFITS OF DIGITAL CURRENCY EMPHASIZED

Zhang discussed CBDCs in an address given at a conference hosted by the London School of Economics. He pointed to numerous advantages that these currencies can bring to the financial space, particularly by enabling rapid, seamless transfers and providing financial services for the unbanked.

Notably, however, was his recognition that a revolution is underway across the global economy, and that central banks must innovate in order to avoid being rendered obsolete. Specifically, he asserts that CBDCs have the potential to stem the growing popularity of stablecoins, which he stated “may be difficult to regulate and could pose risks to financial stability and monetary policy transmission.”

IMF Discusses digital currency

Zhang was also quick to point to the challenges that may come with the mass adoption of these assets. Most notably, the current global financial space is not designed to accommodate borderless digital currencies. Thus, one or a select few strong CBDCs could come to dominate the world. He referred to this possibility as “dollarization.”

On the one hand, a CBDC used as an international means of exchange could improve the efficiency of cross-border payments, which are currently costly, slow, and opaque. But at the same time, CBDC available across borders could increase the probability of currency substitution (“dollarization”) in countries with high inflation and volatile exchange rates, and therefore reduce the ability of the central bank to conduct an independent monetary policy.

PrimeXBT - BTC leverage trading. Altcoins, forex, CPD!

One interesting suggestion was the possibility of banks creating fiat-backed digital currencies, which Zhang termed “synthetic CBDCs.” Such tokens would enable the banking sector to assume the challenges related to managing these digital assets. For example, enforcing anti-money laundering and know-your-customer regulations. The tokens would, however, have the backing of a trusted central bank.

ADDRESS UNDERSCORES BLOCKCHAIN’S REVOLUTIONARY APPEAL

Over the past several months central banks across the globe have begun aggressively searching for a means to stem the mass adoption of cryptocurrencies such as Bitcoin. CBDCs are not an innovation introduced by these central authorities for the altruistic benefit of their users. Rather, central banks now understand that blockchain assets threaten to render them obsolete, and CBDCs are a desperate attempt to introduce viable competition.

The true challenge for central banks rests with the fact that the open, borderless, and anonymous nature of cryptocurrency cannot be replicated by any centrally controlled asset, even if it were digital. In fact, most fiat currency is already used in digital form. The private banking sector has come to realize this fact, and is now taking steps to form business models around blockchain technology. Perhaps the best move by central banks will be to acknowledge the changes ahead, and begin legitimizing this new asset class rather than seeking to undermine it.

What do you make of the IMF Director’s recent comments on central bank digital currency? Add your thoughts below!

Images via Shutterstock


[Source] Author: Trevor Smith

Default image
Bitcoinist
These posts are syndicated from bitcoinist.com. Founded in 2013, Bitcoinist has quickly grown to become the prime source for the latest information about Bitcoin, digital currency and blockchain technology. Bitcoinist is now visited by over 2 million readers each month thanks to one of the most reliable teams in the space, consisting of three experienced editors and over a dozen writers. From business news and technical price analysis to community events, Bitcoinist provides valuable insight in its wide coverage of the entire cryptocurrency industry.